Growers Cotton to Incentives

Equity Programs Spice Up Prices

Darin Owens, left, Dennis Gathright, Sam Wilson and Michael Mangrum, Monette Cooperative, are smiling this spring as cotton acres return to the Buffalo Island region of Arkansas. (DTN photo by Elton Robinson)

Excitement for cotton has been palpable this spring in the Buffalo Island region of northeast Arkansas. Bags of cottonseed filled retail warehouses and local gins geared up for a big season early based on falling prices in competing commodities and generous gin rebate and equity programs for cotton.

Sam Wilson, who runs the Monette Cooperative in Monette, Arkansas, said area cotton producers booked about 31,000 acres of cotton with the cooperative this year. If cotton yields reach the typical average yield for the four-county region, it could mean somewhere in the vicinity of 65,000 bales of cotton running through the cooperative's three Cherokee gin stands this fall. The cooperative ginned a little under 23,000 bales in 2015.

"This is the most interest I've seen in cotton in Buffalo Island in 11 years," Wilson said.

At Monette Cooperative, the equity program for producers is a hefty 16.5 cents per pound. Gin rebates have averaged 15.3 cents per pound over the last five years. The gin rebate fell to 8 cents last year, but Wilson expects this year's to be higher. The gin rebate for 2016 won't be determined until March 2017.

Gin rebates are generated by profits from the cooperative's enterprises, including its farm supply store, fuel sales, NAPA parts sales, cottonseed sales from the gin and rental income from Crop Production Services, which operates in the complex.

Merchants offer equities for cotton to buy it out of the CCC loan program. Equity programs can be offered prior to the season based on factors such as the perceived value of the cotton in the open market, the LDP, warehouse charges and quality of the cotton. Such programs are also valuable to lenders considering farm production loans.

Cotton producers who sign up for the equity program place their cotton in the CCC loan program where they can capture around 52 cents for their cotton, and more if it exceeds base quality. In 2015, the average loan price in the region was 54.85 cents. With equity and gin rebates hopefully totaling 24 cents a pound or higher, a farmer can land a cotton price of 76 cents to 78 cents or more.

That was incentive enough to stir interest among farmers since futures prices were sitting around 60 cents a pound at planting. Dennis Gathright, cotton producer and president of the board of the Monette Cooperative, said producers responded because spring corn and soybean prices were below the cost to produce them in the region, while cotton, with incentives, was closer to breakeven.

"In some ways, cotton is the lesser of the evils," Gathright said. He planted most of his acres in cotton this year.

Producer Michael Mangrum, who is secretary of the board at the cooperative, said he will plant all his acreage in cotton in 2016 after a year in which grain yields and prices disappointed.

In early spring, producer Darin Owens, vice president of the board at the cooperative, was a lone holdout, thinking about going with peanuts over cotton. "We're in the middle of some of the best peanut ground in the United States," said Owens. "In cotton, on our farm, we've had a couple of disasters -- a hailstorm and bacterial blight in the cotton left a bad taste in my mouth. Cotton doesn't look attractive to me. Peanuts do."

Seconds later, Owens shook his head and appeared to change course. "This cooperative deal is very attractive. I'm still blowing in the wind over it." Eventually, Owens decided to plant 120 acres to cotton.

Wilson believes a cotton price of 80 cents per pound can be profitable for producers. "A lot depends on the lint per acre. If a farmer makes 1,000 pounds per acre, that's marginal. But if he can make 1,200 pounds to 1,500 pounds, then he's making money," he said.

MERCHANT BUY-IN

Sam Clay, a trader with Olam Cotton, in Memphis, Tennessee, worked with Wilson to construct the equity program for the cooperative. After ginning, the cotton is transported immediately to Olam's facility in Memphis. As classing information comes in, Kathi Watters, who runs Harvest LSA, a subsidiary of Olam Cotton, will place the cotton in the loan and funds in producers' hands within 24 to 48 hours.

At that point, Olam will be the subholder of the receipts and the Commodity Credit Corporation will be the holder of the receipts. Olam will then have approximately 10 months to decide when it is best to "redeem" the cotton from the loan. All charges including the loan value must be paid to allow this. Afterwards, he may also take positions in the futures markets for hedging purposes.

"When they deliver the cotton to us, our cash outlay is only the equity portion," Clay said. "So right then, you're looking at a financing benefit. It allows us be a little more creative with our money."

A warehouse rebate from Olam Cotton also figured into the equity program at Monette thanks to some creative thinking by Clay and Wilson. Warehouse rebates in the Midsouth are typically 5 cents to 6 cents per pound, which are paid to gins for their choice of distribution. In Monette Cooperative's case, Clay rolled it into the producer's equity program on the front end.

Because the cooperative owns the gin, "the gin pays it back to farmers anyway, so we might as well get it all on the front end," Wilson said.

Equity programs and gin rebates can be risky because some aspects of them, the price of cotton and cottonseed for example, do fluctuate. Still, the programs reward producers, gins and bankers, who see them as a tangible asset for lending purposes, and cotton merchants like Clay, who too often compete against one another for a shrinking amount of cotton.

COTTON IS CONTAGIOUS

"We are absolutely thrilled at the opportunity this has given us," Gathright said. "That's not just for the cooperative but for the community. I think people just feel better when cotton is out here. We're farmers. If we're making money, we're spending it. A little spark of upbeat news, it makes everything go better."

"This is just cotton country," Wilson adds. "Producers want to raise cotton if they can make money at it."

USDA's March 31 Prospective Plantings survey indicated that the incentives could be having an impact. Midsouth producers reported intentions to plant 1.435 million acres to cotton this year, a 46% increase over last year's 985,000 acres.

The biggest percent increase is expected in Arkansas, where acres increased from 210,000 in 2015 to over 330,000 estimated for 2016.

While the rebound is impressive, cotton acres in the Midsouth are still off from the 2.475 million acres planted in 2011, when prices hit over a dollar a pound. That year, Arkansas planted 680,000 acres to cotton.

Wilson said it takes a team effort -- from suppliers to merchants -- to maximize the equity program and gin rebates for producers. "We at the cooperative realize that if we don't make a profit, we don't have a job. That's the way it works. The more that we can do to help the farmer, and the better prices we can offer, the more profits we can offer back."